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Market Analysis: Dec 19, 2008: John Roach, Senior Market Analyst

posted on December 19, 2008

Grain prices rallied this week on positive changes in fundamentals.

For the week, March wheat gained more than 50 cents while the nearby corn contract moved 7 cents higher.

Dry weather in South America pushed soybeans higher as well. For the week, the January contract gained nearly 15 cents, while the nearby meal contract was up almost $10 per ton.

In the softs, cotton trended higher with the March contract posting a gain of nearly $2.

In livestock, December cattle were up $2.77. Nearby feeders gained more than $6. And the February lean hog contract lost 58 cents.

In other markets of interest, the Euro gained more than 500 basis points against the dollar. Crude oil lost more than $12.00 and closed below $34 per barrel. Comex Gold rose nearly $17 per ounce. And the Goldman Sachs Commodity Index lost 12 points to close at 335.50.

Market Analysis: Dec 19, 2008: John Roach, Senior Market Analyst Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Well, what a year it's been. Volatility is certainly the word of the market of 2008 as we look back on it and I think it has to be -- the height has to have been that huge oil bubble that we had back in mid-summer when oil prices were up close to $150 a barrel, now we just reported they're around $34 a barrel. How does this all shift, John? As you look at this as a grain industry participant and observer for a lot of years how do you rate 2008 and what do you see ahead for 2009?

Roach: Well, 2008 can only be described as wild. What we saw was a huge bubble in commodity markets led probably by energy, I say probably because we really saw a demand from around the world for everything. Every hard asset seemed to develop new demand and attitudes that prices needed to go higher so we had huge speculative participation until it finally stopped and once it stopped we rolled all the way down and we combined that liquidation in the commodities with liquidation in equities and liquidation really in about every investment vehicle out there. And so it became so bad that people lost confidence in what they could invest in and we're still at that stage although my sense is that the confidence is starting to return. And as we look forward into 2009 we have to count on our new administration coming in with new plans and new programs and I think we should be optimistic about that. I think they're going to have the big support of the consumers and the population. I think that we're at the worst stages now. I actually think the worst stages have already passed. I think we were there in October and November and I think we have a better outlook as we look into 2009 but nobody is convinced of it yet, the market is going to continue to have big volatility, we're seeing currencies move massive amounts in short periods of time as people are trying to get their arms around what lies ahead. And so volatility for a while but I think a firming market, at least agriculture markets, as we move into 2009.

Pearson: Have we overcorrected on the down side? We were just talking about crude oil here this week. You go from $146 a barrel down to $34?

Roach: Well, who would have thought? So, my guess is we are probably too cheap. We probably won't be able to expect these prices -- although we see people forecasting that -- we probably won't be able to keep prices down that cheap because we're going to see some demand come back would be my guess. But meanwhile we're stacking up inventories of crude oil, ships are being leased, the returns are something in 30% to 40% returns if you are able to rent a ship, fill it with oil and sell it for January of 2010 delivery. So, there is a huge storage premium there that's available because we have such surplus oil production right now. So, I'm not suggesting we're ready to go up on the oil prices but it would sure seem to me that we are so cheaply priced in oil and really a lot of other marketplaces and I think it's all because, again, the lack of confidence that everything is going to be okay.

Pearson: Let's talk about this week in the markets, let's start with wheat. John, as you look at the wheat market we had two short production years and then a good year this year, pretty decent year worldwide. The market was up a little bit. Is this a time of the year when you should be thinking about selling wheat?

Roach: We actually got a sell signal in wheat today and so for people who are needing to make some wheat sales we think it's time to be making some of those sales. We anticipate that the market will cycle back down, come back in the next rally, could be actually higher than this one but for those people who need to generate cash now is the time to be selling wheat. We've come up a pretty good shot up off of the bottom. We're nervous right now about the cold weather for the winter wheat crop without much snow cover. We've got cold weather in other areas around the world where they raise wheat. And so we think that the fundamentals are maybe turning a little bit more positive there. But we've got a lot of wheat to work our way through. There are huge crops in Europe and the former Soviet Union countries and the surpluses are getting bigger as we saw in the December report.

Pearson: And we're feeding some wheat now too and importing that so there's another factor that is impacting another commodity and that is corn. This corn market has taken a huge decline that mirrors really what happened with crude oil. We've seen a little bit of a bounce here this week. What are your thoughts, John? Have we got the 2008 crop put away?

Roach: Well, we've got it all put away or mostly all put away and the rally that came, came as some combinations I think. One, I think it was hard to buy any corn. I think we started to see the acreage battle kind of start to play out itself. We saw Informa a week ago talking about corn acreage being cut for the 2009 crop year. I think as we look in South America we see their corn crop is going to be smaller because the cost of production is more than what they are being offered for the crop and they are tight on money, the capital is tight. We know that in the former Soviet Union the capital is going to be tight. Their winter crop plantings are down compared to what they were a year ago. So, the fundamentals are starting to change. The corn market probably would have started to rally sooner than this, however, the negative feelings around the marketplace really took it down probably to a price lower than it should have been to.

Pearson: This is typically not a time of year when you recommend selling corn but you've talked about a sell signal on corn for a couple of days.

Roach: Yeah, we had a sell signal on corn I think it was Monday that it started and so we advised our clients to be making some sales, again, just to cover cash flow needs. We think that the best markets will come in the March through June timeframe and we actually think that the peak this year, unless we have a weather problem that comes along, the peak is likely to come earlier than normal. So, we're really suggesting to farmers not to plan on holding everything into June and July but instead look at March and April as a key selling period here for 2009.

Pearson: What about the soybean market as you're looking at what's happening with the oil seeds around the world, decent crops down in South America, a little bit of a weather bump this week though down there so what is your take on soybeans going forward?

Roach: The South American crops are actually shrinking and we've actually seen that really fairly steady over the past couple of months. From what the early ideas were on those crops they didn't get all the acres planted they anticipated and they didn't get all of the inputs put on perhaps that they'd like, their fertilizer sales in the month of November were down about 40% or so from what they were a year earlier. And then, of course, they've had dry weather conditions that are really threatening the crops and even more so threatening the corn crop. So, what we think is that we have a market that is going to ratchet a little bit higher in here into their growing season and we want to be making some sales.

Pearson: Okay, so take advantage of that one when that opportunity occurs. What is your price target? We've just had some numbers come out from a couple of schools, Iowa State talking $4 break even on corn, $9 on beans. Are we going to get a chance to make some money? The market has got to rally quite a bit from where we are right now for a farm price.

Roach: I've never been good at forecasting where prices are going to go. We try to instead say, hey, here's a peak, let's sell it. But I'm not sure where that peak is going to be. I'm pretty comfortable saying the timeframe it's going to occur in that March through June timeframe but the price level I don't know. Right now when we're looking at so much uncertainty around the world and such a volatile timeframe I think if we look out forward we have too much of our decision based on our most recent history. And so if you make your decisions based on the last six months you've got a whole different thought process than if you make your decisions based on the last eighteen months or twenty-four months. The last eighteen or twenty-four months we thought we were going to run into very tight supplies and we had very tight supplies of both corn and soybeans and now all of a sudden it looks like, holy cow, we're going to be really surplus. Typically if you move your ideas so fast you typically are going to get yourself in trouble. So, I still think we have to understand the world supplies are tight, we must raise big crops and if we have any kind of weather problems threatening these big crops we're going to go back to some higher price levels and typically we worry about weather problems in the spring. So, I think we should just relax a little bit about what the level is going to be and just be prepared to make sales in the spring when we see some peaks.

Pearson: Real quick let's talk about the cotton market, John, that's been one that's been pummeled. I've talked to producers down south who tell me they've been lured over to the other crops and away from cotton for good reason. There's been a lot of pressure there. What is your take on cotton going forward?

Roach: Well, they're taking estimates right now for another million acres to come out of the cotton crop this year, another million acres to come out next year. The consumer demand is down and, of course, cotton is a consumer demand type of a product and we're just struggling, our inventories worldwide are still too big. So, we think that the market is going to be a tough market to get much of a rally out of.

Pearson: A nice rally this week over in livestock in the fed cattle on the board.

Roach: Well, again, confidence started to come back, exports have been good. We think the livestock market will come back around here as we move into 2009. So, our position right at the moment is look for a better spring, we think that prices will be better.

Pearson: The feeder cattle market also had a big jump this week. Usually we see corn prices go down and we see feeder cattle go up. That's not the case the last 60 days, finally we got some catch up.

Roach: And we finally got the feeder cattle to move a little bit. We've actually had the cattle at crush, I mentioned this last time I was on the show, we've had the cattle on crush which is buying feeder cattle, buying corn and selling fat cattle at some of the highest levels that it's ever been. So, the opportunities have been there. If you're at the sale at the right day there's been opportunities to buy cattle and put them on feed and be able to hedge them closer to or above break even than you've had for quite a while.

Pearson: About 30 seconds, John, hog market as you look forward. What do you see?

Roach: Again, higher prices as we move on into the summer, as we start to get some confidence back in this economy.

Pearson: And, of course, a great opportunity to take advantage of some lower feed costs for livestock producers.

Roach: Absolutely, if livestock producers haven't covered feed needs they need to be doing that on any weakness.

Pearson: As usual, John Roach, some great insights, always great to have you with us and see what you see going forward. But that will wrap up this edition of Market to Market. Now, if you'd like more information from John on where these market just may be headed visit the Market Plus page, it's at our Web site. You can also find streaming video of our program there and you can also download audio podcasts of our Market Analysis and the Market Plus segments absolutely free at our Web site. Of course, be sure to join us again next week when we'll learn how two political veterans from opposite sides of the aisle united to serve a higher cause. Until then, thanks for watching. I'm Mark Pearson wishing you a very happy holiday.

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